Declining home sales in smaller Chinese cities during Lunar New Year point to longer term troubles

Property developers in China's tier 3 and 4 cities have reported disappointing home sales during the traditional Lunar New Year buying season this year. And their troubles might not end here, according to industry insiders.
According to analysts, a combination of factors is affecting the market in mainland China's smaller cities, ranging from short-term concerns such as a slowing economy and souring property sector outlook to a general lack of demand. And a planned removal of government subsidies may worsen the situation.
"The prices in tier 3 and 4 cities may come under the greatest pressure, especially after the central government slows down subsidies for households relocated due to slum redevelopment," said Raymond Cheng, property analyst at financial services provider CGS-CIMB. He estimated a decline in sales in smaller cities would lead to a 10 per cent drop in China's overall sales volume this year.
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"Tier 1 and 2 cities saw healthy demand from a robust economy and population inflows. [This was] not the case with other cities," he added.
Disappointing sales during Lunar New Year, when people returning from China's big cities buy apartments, do not bode well for the coming year. According to consultancy CRIC, home sales in 28 tier 3 and 4 cities fell by 23 per cent year on year in the January 28-February 10 period, as opposed to 4 per cent in tier 2 cities.
Home Sales in Shaoguan and Huizhou, above, in the southern Guangdong province fell by more than 70 per cent during Lunar New Year this year. Photo: Bloomberg
Home sales fell by as much as 73 per cent in Jinjiang, a city in China's south-eastern Fujian province. Sales in Shaoguan and Huizhou in the southern Guangdong province too fell by more than 70 per cent.
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These declines have added to concerns that home sales in such cities peaked in 2018, a potentially huge blow to the whole sector as such sales accounted for two-thirds of all new property sales in China last year, according to S&P. A boisterous market in small cities in 2016-18, a period during which prices generally doubled, was the chief reason why China's national sales volume and average price defied a downturn in its biggest cities to deliver double-digit growth.
The scale back in slum redevelopment this year has been bad news for China's smaller cities.
Slum redevelopment plans were the single largest driver of the boom " transactions by people compensated with several homes or cash might have contributed with more than a fifth of home sales in 2017, according to investment bank China International Capital Corporation.
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The slum redevelopment plans of 20 provincial governments for 2019 reveal a 30 per cent decline from 2018, with corrections of as much as 80 per cent in some provinces.
Hong Kong-based financial services company Gavekal Dragonomics estimates the scale back in cash compensation alone could lead to a 10 per cent decline in sales volume.
Li Lei, a Beijing accountant, said the only reason people could afford to buy property in Dezhou, a small city near his village in the eastern Shandong province, was government compensation. He said that while he was advised earlier to buy property in Dezhou because he could not afford one in Beijing, now he could not afford a home in Dezhou as well.
Residents of his village had been compensated with three to four homes after their old properties were torn down by the government. These residents plan to sell some of the homes received as compensation to buy apartments in Dezhou. Similar actions by residents of another village had already driven up prices in downtown Dezhou from 4,000 yuan (US$597) per square metre at the beginning of 2018 to more than 8,000 yuan by year end.
The province has cut its redevelopment plan for 2019 by 75 per cent, and Li said he would not buy a home in Dezhou, because of a property bubble.
Another reason for not buying a property in his hometown, Li said, was that he wanted to live in Beijing. He is not alone " 56 per cent of respondents to a recent survey by property listings platform zhuge.com said they would prefer to buy a home in the city they work in. Only a quarter said they would consider buying property in their hometown.
This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.
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